Tax increment financing is one of the most widely used—and least understood—public finance mechanisms in the U.S. today. David Merriman, one of the foremost experts on TIF, talks about what communities and states can do to avoid the pitfalls.

Since its inception in the 1950s, tax increment financing has taken hold across the United States as a popular public-finance mechanism. But critics say this approach favors the private sector, while...